The Ethics of Bootstrapping
At no time is there more pressure to cut ethical corners than when your company's survival -- and your own economic well-being -- is at stake
Scott Cook founded Intuit, maker of the check-writing-software product Quicken, in 1984 with $151,000, after being turned down by venture capitalists for the $2 million he thought he would need. The start-up cash was quickly exhausted on product development, and the Menlo Park, Calif., company scraped through three desperate years before hitting its stride. Today Intuit has 400 employees. Sales last year were $44 million, and this year's revenues are expected to reach $80 million. Despite dozens of competitors in this category, Intuit has over a 70% market share.
This article is derived from conversations between Cook and associate editor Leslie Brokaw.* * *
When you're a little, struggling start-up, you're confronted by ethical questions almost every day. Your company has no visible track record, or a very limited one. Or, like us in our early years, a very shoddy one. We had a poorly selling product for several years, we had no money, and our two closest competitors were corporate subsidiaries that together spent $7 million on marketing during our launch year alone.
That's the test of your ethics, when you're staring straight at the shame of failure. Each week your ethics are challenged by the promises you make. How much do you embellish your financial condition, the resources behind you, the success of your customers? What do you tell employees? Prospects? To get the sale, do you promise things you know you can't deliver? Do you make promises to your employees that you know in your heart you can't keep? I found I couldn't do those things. I just couldn't get my enthusiasm up for it; I had to do what felt right. Of course, no one would argue that businesspeople should do otherwise. But they do do otherwise, all the time. Because it's business we're talking about, and because it's cutthroat and you can rationalize almost anything, and because -- especially when you're bootstrapping as we were -- it's a matter of survival.
But what I've learned, and what all too many bootstrappers can miss, is that being truthful is good business. Apart from moral judgments, consider expediency -- and expediency is what bootstrapping amounts to. Business is about doing right by the customer and by your business partners, which include vendors and employees. If you do right by them, your business will flourish. If you don't, your business won't. You may solve some temporary bind by fibbing, but it will come back to haunt you. It's not just wrong; it also doesn't work. Being ethical isn't a fairyland, Boy Scout idea, nor is it naïve. I wanted to build a business for the long term. And trust is one of the most important sources of your power.
Let me give you an example. We sell our software to retailers and dealers, who resell it to their customers, the end-users. It is common in our industry, as in a lot of industries, for salespeople to "load" the dealer with too much product. There is an old slogan, "a loaded dealer is a loyal dealer," because he won't want to push the competitor's product until he gets rid of yours first. With that in mind, some companies invent elaborate schemes to get dealers to buy more than they need; their salespeople overstate demand, exaggerating how well their product is going to sell or how big a promotion is.
Well, we don't do that. We don't think it's right to tell dealers they're going to sell 100 units a month when they're really going to sell 40 -- or, in our case with the major chains, 10,000 units when 4,000 is more like it.
Is this an issue of ethics or smart business? Frankly, I think the two merge. Although it means we sometimes miss higher revenues at the end of a quarter -- that's why other companies load dealers, to maximize numbers so salespeople can get their commission checks or show off to the president -- in the long run, being honest has served us better. For one thing, if you produce a large chunk of product and then don't get orders for three months, your manufacturing facility sits idle. That kind of boom-and-bust cycle is inefficient -- it's hell on manufacturing people, who find it much easier to produce a level, constant volume of product.
We'll actually tell accounts they've ordered too much, that we'd like to ship them less because we think they're overbuying. And because of that, they've started to trust us in surprising ways. When we launch a new product -- we've brought out three in the last year -- we get into all the chain stores instantly. They don't even question it, because they know we're not going to screw them. What's more, many of the accounts now say, "We trust you, how much should we order?" Normally that would never happen. They would try to figure it out themselves, or they'd ask the salesperson and cut that recommendation in half. Instead, they're relying on our advice in ways that are very untypical for chain-store buyers and very helpful in building long-term partnerships.
It's amazing how uncommon it is to think about sales that way; so many companies seem to be out to snooker dealers as much as possible. That attitude is everywhere, probably because managing a company for short-term revenue is so much easier. It's all in the numbers. If the revenues aren't there, some presidents yell a lot, and people learn to run around and get short-term sales. Those presidents tell their people, "I don't care if the demand isn't there, go and sell them." That's easy; any idiot can do that. And many idiots do.
Ethical temptations continue to come up for us. For instance, we offer a consistent price to all our major accounts; it's the best price we can afford. But some of those accounts will call and say, "Hey, if you knock 5% off your price, I'll place a big order right now." Well, more volume is better, especially for a bootstrapped company, right?
Wrong. It probably wouldn't mean any extra sales to end-users. What it would mean is less revenue per unit -- 5% less -- and, more important, it would mean you lied. All your customers are concerned that they have the best deal, and when we say, "Nobody gets a better price than this," that's got to be true. If we trim prices for certain accounts, we're lying. It's common, but ultimately it will hurt you.
Some customers are always looking for you to bend your rules, but if you hold out, the benefits can be enormous -- and not just financially. Recently we pitched a hot, exclusive promotion idea to a large wholesale distributor. We were going to offer a special version of a product if the consumer bought other software at the same time -- a dealer-created bundle.
The wholesaler turned us down, so we offered it to a second wholesaler, who took it. Soon dealers started changing wholesalers to get this special product, and the first wholesaler was livid. Its reps screamed at our director of sales that we had to offer the same deal to them.
We arranged a Saturday conference call with this wholesaler's chairman, and he was angry. He threatened to stop promoting our products, start pushing our competitors' products -- nothing illegal, but things that would hurt our business. I need to get this same promotion, he said; what are you going to do for me?
And we said, "No, we offered the promotion to you first. You turned it down. The other wholesaler bought it on the agreement that it was an exclusive for them. For us to give it to you would mean going back on our word." He said, "So don't give me the promotion. Give me a million dollars in cash and I'll simulate it." And I said we couldn't do that; it was ethically wrong. The call ended when we agreed to disagree, and we said we'd talk a few days later. We went away really nervous.
Monday morning the wholesaler's reps called and said they understood our point of view, they respected it, they knew we had come to them with other good ideas, and in fact they thought our ideas were so good they wanted to elevate us into their top rank of vendors. They'd compensate for this promotion problem in another way.
It came totally out of the blue. We thought we'd have a year of really hard sliding with that account, because once an account is pissed at you, it tends to stay pissed. But not at all; our stand enhanced our relationship.
What's clear is that if that wholesaler's management had pushed us around and succeeded, we would have lost their respect. And there was great temptation. I mean, it was really tempting to do something that would have been against our word.
And this is the point: while a lot of bootstrapping companies think about the consequences of failure -- "Gee, if I don't fib about this, I'm going to fail, and if I fail, I'll lose all my money, and my wife and kids, and my self-respect" -- I don't think they consider the consequences of success. What happens if you lie, and are successful? Your customers may know you lied, and employees will definitely know you've lied, and you've set up a culture in which lying's OK -- or worse, in which lying is linked with success.
The things that help make a company successful become the elements of its foundation, the stories through which new employees learn what's right and what's expected of them, and how they can succeed. Do you want those cultural legends to be about tricking others? You've got your choice.
If you create the right culture, people will do the right thing. I remember when we were working on one ad, our graphic designer came to see me, and she seemed hesitant about it. I said, "What do your guts tell you?" She said, "I just don't think we're being straight with people." If her guts told her that, she was probably onto something. She talked to the marketing vice-president about it, and we never ran the ad.
You have to realize that as a CEO, you're a role model and an example. People learn from your actions more than you ever believe. Now, we're not perfect; there are tough judgment calls every day, by people at every level in the company, and we don't always get it right. But I know that our chances of getting it right are highest only if our culture demonstrates the right values for people. The underpinnings of how you run the company give people rules they live by, and people will really believe in them and hold them dear.
It's a rare thing, this opportunity to create a culture; there's almost no place in our world where you can do that. Normally, you take culture as a given. American culture is American culture; we lament that politicians can't lead us better, that kids don't study harder, that too many people are crooks.
But when you create a company, you can create a culture -- not in wide variance with what surrounds you, but you can move values, subtly and not so subtly, in the direction you want. It's the most powerful thing you can do, to seed that culture the right way, because ultimately, that will become more important to the success or failure of your company than you are. The culture you establish will guide and teach all your people in all their decisions. And if you've got a choice about the culture you create, why build it on a foundation of fraud?